It only took 17 years.
The S&P 500 tech sector finally got its groove back after the historic bursting of the tech bubble between 2000 and 2002.
The tech sector collapsed about 80% from its peak in March of 2000 to its trough in October 2002 . It then regained some of the ground but suffered another big setback along with the rest of the equity market amid the financial crisis and the recession of 2007-09 (see chart below).
On Monday, the Technology Select Sector SPDR ETF
hit a new all-time high at $53.59, finally surpassing its previous peak hit 17 years ago on a total-return basis.
This means that if you had put money in the ETF at its previous peak in March 2000, you would only now be back to break-even or better.
As investors bid up prices of new internet companies, by early 2000, the tech sector grew to comprise more than a third of the S&P 500
Many of these companies had no profit and questionable revenues, but investors put a lot of trust in the potential of the internet.
“This is a good example of why you need to diversify. Being invested only in the tech sector would have taken a long time to get back to even, and that’s not even adjusted for inflation,” said Charlie Bilello, director of research at Pension Partners.
“The lesson is that valuation does matter at extremes,” he said.
The S&P 500 tech sector is still the largest sector, comprising 22% of the index, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. On 12-month trailing basis, the price-to-earnings ratio of the XLK ETF is 23.43, while the S&P 500 is trading at a 21.5 multiple—both well above historical averages.
While valuation of the sector is higher than historical average, the sector itself is a lot different, according to Bilello.
“It’s not the same picture as it was in 2000, as the sector is a lot more mature, with companies paying dividends. But all stocks, not just tech stocks are expensive right now. This is a good time to be diversified geographically, as there are many markets that have better valuations,” Bilello said.
The tech-heavy Nasdaq Composite
on Monday hit an all-time high as U.S. stocks joined a global relief rally in the wake of Sunday’s first-round presidential election, which investors see paving the way for a runoff win by centrist Emmanuel Macron, easing fears of a French exit from the euro and the European Union.
From the archives: The Nasdaq is a very different index from 2000